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Fed Statement: Still Hawkish

Today’s Fed Statement revealed a united Committee set on two more rate increases this year (one in September, one in December) as US economic growth was described as “strong” (as changed from “solid”) with economic activity “rising at a strong rate”. These changes in tone suggest that the Fed is unconcerned about tariff/trade issues, slow wage growth and most significantly, not deterred in its stated path by pressure from the administration. LIBOR replacement takes significant steps: SOFR, the “Secured Overnight Financing Rate” which is an index based on the cost of borrowing collateralized by Treasury securities. This is a reform that grew out of LIBOR “rigging” scandals as part of the LIBOR index is based on surveys of bankers. SOFR is entirely transactions based and has been gaining in stature since its introduction in mid-April (note that the reform commission targeted 2021 as the end of LIBOR) The SOFR rate opened at about 1.83% and has traded in a range of about 1.65% to 2.12% since then and sits at 1.93% (in the same time frame note that 30 Day LIBOR opened at about 1.90% and has traded in a range from 1.89% to 2.10%, today at 2.08%). SOFR took a major step towards becoming an accepted commercial loan index this week as as Fannie Mae issued the first ever SOFR based securities, a $6 billion offering. Many lenders in the US watch the agencies (Fannie and Freddie) for guidance on floating rate structures, so this is very significant. We should be seeing SOFR based loan structures soon. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners